*** Today just happens to be Mr. Paul Reuter's birthday.
So, I will begin this installment of the Daily Reckoning
with a headline from the news service he began more than
a century ago:
"Stocks Soar on Tech News, Greenspan Cheer"
*** The tech news to which Mr. Reuter's employees refer
was an increase in IBM earnings. Sales have gone down at
Big Blue for 3 quarters in a row, but profits went up. So
investors were excited and bid up the stock - lifting the
Dow substantially.
*** Mr. Greenspan's cheer, meanwhile, came from his
Congressional testimony, in which the Fed chief said he
saw no decline in productivity and from which analysts
concluded that he was not likely to hike rates again next
month.
*** On the strength of these two inconsequential bits of
information investors drove the Dow up 147 points -
leaving it above its most recent rally peak...and further
confusing the bear market outlook.
*** The Nasdaq responded positively too - rising 128
points, leaving it in the black for the year...by 2.83%.
*** The summer fun was widely shared. 1698 stocks
advanced on the NYSE. Only 1138 fell. 69 hit new highs.
Only 47 hit new lows.
*** Bonds rose too - the bond vigilantes have decided to
stop worrying and join the fun.
*** And gold rose a little, up 80 cents. Platinum rose
$10.90
*** Last, and perhaps most important, the dollar bucked
the trend and fell. I thought the dollar had topped out
back in the middle of May. The dollar index hit 112.08 on
May 17 and then fell to 105.12 on June 8. Since then it
has been coming back, reaching 109.65 two days ago and
threatening to put in a new top. But yesterday, it fell
back...confirming, at least for the present, that the
dollar has joined what Richard Russell calls "the Top Out
Parade."
*** Marc Faber notes that, in this market, even stable
'old economy' companies are getting tossed about like a
peanut at sea. "Procter and Gamble, for example," says
Faber "was rising rapidly and reached a high of US$118.
Just six months later, its stock price has been halved.
And Circuit City: in mid-May of this year, its stock
fetched US $64; then, barely a month later, it had fallen
to US$35. Or consider Office Depot: it reached a high of
US$26 last summer. Then it slid to around US$10, and
although it recovered to US$15 in mid-April. It is now at
US$6."
(see: I Know that I Don't Know... Socrates 470-399 B.C.
http://www.dailyreckoning.com/body_headline.cfm?id=257)
*** "Northrop Grumman isn't grouped among the high-tech
stocks or listed on Nasdaq. But its as high-tech as it
gets." says the Fleet Street Letter's Lynn Carpenter.
"With a P/E of 8.7, price to earning growth ratio of 0.8
and price to sales of 0.42, it's obviously worth looking
into. I did, and it didn't surprise me a bit that
Northrop has brought our Fleet Street readers a fine 27%
return in three months."
(see: The Best Tech Stock in the World-Isn't A Tech Stock
http://www.dailyreckoning.com/body_headline.cfm?id=256)
*** I asked Lynn what she thought of the tobacco
companies in the wake of the Engle decision:
"A contrarian and a value investor has to love the
smokers," she replied. "But Camel or Marlboro? Phillip
Morris, the Marlboro Man-ufacturer, is a bargain at P/E
7.3, P/S 0.68 and is going for half its earnings growth
rate. But if you really want to be contrarian, take a
look at RJR's Camel-cade." {Lynn, a linguist in an
earlier career, loves to play with words.) "RJR has [an
even lower P/E] and a not-too pricey price to earnings
growth ratio of 1.3," she continued. "They both
pay hefty dividends, too...7.9% for MO and 11.4% for
RJR."
"But what I like best is that extremely rare thing...both
have sell ratings from some analysts. One more thing:
Insiders are buying RJR heavily and steadily."
(see: The 3 Best Stocks on Wall Street
http://www.dailyreckoning.com/body_headline.cfm?id=142)
*** The tobacco companies are pretty darned cheap. Here
are some more cheap stocks, companies that have the
misfortune of being traded in Bangkok rather than New
York - courtesy Doug Barnett of Quest Management, by way
of Marc Faber.
"When it comes to compelling investment opportunities,"
writes Mr. Barnett, "Thailand...has no equal." Foreign
investors have pulled out of the market - leaving prices
at levels resembling US cigarette makers.
*** KCE Electronics, for example, is one of the 100 top
PCB manufacturers in the world. Net profit is expected to
increase at almost 30% this year. The pretty darned cheap
stock is available at only 6.2 times earnings.
*** Regional Container Lines is a market leader trading
at 5 times enterprise value and only 2 times earnings. It
is not a tiny company, but one that has thousands of
ships and containers and an annual profit of about $70
million in the current year.
*** Or how about this - a company selling at 78% discount
to net book value...the 38th largest stock in Thailand.
Banpu is in the power generation business. Shares are
trading hands at less than 20 Thai baht each. But,
according to Barnet, "Banpu should convert non-core
assets into nearly 5 billion [Thai baht] of cash, or
nearly 24 [THB] per share.
*** The Pizza Company owns and operates over 280 fast-
food restaurants in Thailand. Earnings have grown at 21%
year over year, and are expected to continue growing at
more than 25% for the next 4 years. Barnett forecasts
that EPS will grow 29% this year. But the stock is
trading at only 5.8 times earnings.
*** Today is the first day of Thermidor, according to the
calendar of the French Revolution. The Jacobins, rational
to a fault, created a perfectly logical - and totally
absurd - new calendar, which was rejected as soon as the
revolutionaries were tossed out. Today is also the
hottest day of the year, in the Northern Hemisphere,
according to meteorologists.
*** But here at my new office, on the corner of Rue des
Lombards and Rue St. Martin...with the bells of St. Merry
ringing in the background...it is not hot at all. It is
pleasantly warm, under a clear blue sky.
A small group of investors are making money hand over
fist, safely. They don't worry about volatile markets.
They don't lose sleep over inflation numbers. Use the
underground investment secrets of a bona fide Wall Street
legend. You'll LIMIT RISK & INCREASE PROFITS. Read this
FREE report...
www.dailyreckoning.com/fortune15
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
"[W]hat the United States owes to foreign countries it
pays - at least in part - with dollars that it can simply
issue if it wants to."
Charles de Gaulle,
President of France
1965
Gold, as we all know, is believed to be defunct. It has
been tossed on the scrap heap of monetary history...along
with notes issued by the Bank of Howardsville, Virginia,
and the Confederate dollar...neither of which could
compete with the stronger, better-positioned U.S. dollar.
Gold has been made unnecessary, we are told, by the "just
in time," zero inventory policies of ATM-connected
households. People who don't save dollars certainly see
no reason to save gold. And its job as a back brace for
central bankers has been eliminated. The work of
disciplining the currency markets is done today by bond
vigilantes and the market itself. With inflation-adjusted
treasury bonds, for example, which pay only slight less
interest than a non-adjusted bond, who needs gold?
Never since the Middle Ages have people had so much faith
in something they couldn't see. Then, it was the power of
the Almighty God, whose works were both mysterious as
well as omnipresent. Today, it is the almighty dollar -
manifested more often in strings of digital code than
actual pieces of paper.
Faith in "the system" must be at an epic high. A family
in Duluth, with no savings of any sort, is so confident
that its needs will be met that it lays in no supplies...
neither food, water, heat - nor a medium of exchange with
which to buy these things. Instead, the head of the house
is sure that when she goes to the nearest ATM
machine...or uses one of her 13 credit cards...the
programmers and clerks that tend to these things will not
let her down.
A year ago, this confidence was put to the test. Computer
nerds remembered that they had failed to allow for the
biggest numerical change in the Gregorian calendar in
1,000 years...when 1999 turned into the year 2000.
Programmers, IT engineers, professional alarmists, and
our own Gary North warned that if the problem were not
corrected in time (and there was widespread doubt that it
could be) the entire system could collapse.
Whether by expensive intervention or cheap dumb luck this
did not happen. The present year was rung in without so
much as a single ATM machine in Tajikistan reporting a
failure. This, of course, has confirmed the impression
that the system is invulnerable.
The system in which people seem to have most faith is the
Federal Reserve one. Custodian of the dollar, and
helmsman of the world's largest floating economy, the Fed
has reached a level of public confidence only surpassed,
perhaps, by Biblical figures. In fact, I have it from one
of my usually unreliable sources that they no longer
serve fine wines at meetings of Fed officials. They serve
water, and Alan Greenspan turns it into wine.
"That makes two leaps of faith by our count," writes Jim
Grant, still keeping his eye on those interest rates,
"the first being the universal acceptance as money of the
slips of paper designated 'legal tender for all debts,
public and private,' or words to that effect. Not only do
people accept, indeed covet, this intrinsically worthless
medium of exchange convertible into nothing except other
units of legal tender, but they also trust implicitly the
public servants who manage it."
You may have guessed from the title to today's letter,
however, that not everyone participates in Fed-worship.
On the question of Greenspan's divinity, there are a
still a few un-believers amongst us.
"What is really sustaining bullish sentiment about the
U.S. stock market and, propping up the dollar," asks Dr.
Kurt Richebacher, a longtime agnostic on the Fed
chairman, "When asked, everybody pulls the same trump
card: Faith in the economy's superior qualities, and
faith in the unique wisdom of Mr. Greenspan. His name
stands for two tacit presumptions: first, that any signs
of undesired economic weakness will prompt the Fed to
instant rate cuts; and second, that the U.S. economy and
the financial markets will just as promptly respond to
any monetary easing."
"There is no doubt," Dr. Richebacher continues, "that he
will instantly fight any threat of recession by
immediately cutting rates and loosening his credit reins.
In reality, he will face the catch-22 situation of his
life...an incalculable risk on the grossly overvalued
dollar... The U.S. currency is vulnerable to any slight
shift in market perception and psychology as never
before." (see: Don't Worry, Mr. Greenspan Will Fix
Everything
http://www.dailyreckoning.com?body_headline.cfm?id=222)
It is vulnerable because in many ways...the almighty
dollar has come to resemble a dot.com stock.
The distinctive feature of the dot.coms was huge losses
and a lack of substance. The dot.coms had only ideas -
funded by huge inflows of capital, which was squandered
on operating losses.
How like the dollar, actually. Taking the U.S. dollar
economy as a whole, current account losses are running at
a record high - more than $1 billion every day, including
Sundays and holidays. And where is the substance in the
dollar? At best it is only a piece of paper. At worst, it
is only an electronic notation.
The dollar dot.com is not only losing money at a record
rate...it has record levels of debt too. Throughout the
economy, debts have soared in the last few years. One
particular form of debt is worth mentioning: financing
the current account deficit has been accomplished mostly
by the sale of U.S. corporate and government bonds.
Foreign holdings of these U.S. dollar liabilities now
total $2.7 trillion. And net foreign indebtedness has
roughly doubled - from about $830 billion to more than
$1.6 trillion since 1995.
Faith in the dollar has been so strong that many of these
foreign holdings are un-hedged. Yet, in a matter of
seconds foreigners can hedge their U.S. dollar balances
with derivative positions. All it would take would be a
hint of weakness...and the hedges would be put on these
gargantuan dollar holdings...which would trigger an
almost overnight collapse of the dollar itself.
Neither book value nor earnings give investors much of a
handle on the dollar's value. Like dot.coms, the dollar
trades on faith and hope, not substance. And like
dot.coms, it is vulnerable to huge shifts in sentiment.
When Richard Nixon was president and the Grateful Dead
were at their first peak in popularity an ounce of gold
would get you only about $35. Seventeen years later, when
Jerry Garcia was again filling stadiums, the gold price
had risen to its own cyclical peak of $825 - an increase
of 2,360%.
Since then, the dollar has shot up like a dot.com in slo'
mo'...up nearly 80% against gold, that is to say...in
very real terms.
Dot.coms issued stock just like the Fed issues dollars
and in exactly the same amounts - as much as they could
get away with. As long as investors were willing to take
up the new currencies, all was well. But in March, a
crisis of confidence developed. Investors began to lose
faith. Suddenly, the dot.com currency - which had been
tendered for all sorts of debts - was vulnerable. Many of
these stocks have fallen 90% and more. Many will surely
sink to the level of a Confederate dollar or an Argentine
Austral.
Could a crisis develop in the dollar? Of course it could.
And it will. In fact, the recent dollar top on May 17th,
could mark its beginning.
Best wishes for a sunny, beautiful weekend.
Your correspondent, back on the job in Paris.
Bill Bonner
P.S. Why not hedge against inflation by buying U.S.
inflation-indexed bonds? Because the debtor is in charge
of keeping the indexes. We have seen, lately, what
happens to inflation figures in the imaginative hands at
the BLS.
About
The Daily Reckoning:
The Daily Reckoning... "more sense in one e-mail than a month of CNBC."
That's what readers are saying about The Daily
Reckoning.
Bill Bonner, recognized internationally as a brilliant writer, entrepreneur
and publisher of The Fleet Street Letter, offers you his daily market
commentary absolutely FREE. For the first time, outsiders are getting a peek into his powerful and profitable investment insights. Bill's practical
contrarian advice empowers even average investors to protect their hard-earned wealth and achieve amazing gains.
Bonner writes his email letter from Paris, France, each morning --
describing the wacky, wonderful world of investment, politics and everything remotely related. Irreverent. Sharp. Honest. Thoroughly, unabashedly
contrarian. It's also among the fastest growing e-letter on the Internet.
It's a brand new service... but it has a distinguished history..
For nearly 62 year, The Fleet Street Letter, the oldest investment
advisory letter in the English language has consistently delivered
invaluable economic and political foresights to savvy investors. Current readers regularly enjoy impressive investment gains even as the market
falters. Here's more from his online readers...
"My small portfolio has followed true to my wife's description of my
investment philosophy, "buy high and sell low." However, that has changed since I started religiously reading DR... I credit this reversal of fortune
directly to The Daily Reckoning" (Timothy)
" Your Daily Reckoning is the best in business commentary... mixing
serious warnings and the state of the market with gentle humor" (Makram)
"It is actually better than some of the newsletters that I pay to
get" (Joe)
"Your statements and philosophy have kept me from storming into the market and in fact [I'm]
making some money in put options" (Frank)
Open your mind with the most stimulating e-mail newsletter that you'll ever read, The Daily Reckoning. To receive this free daily email newsletter
click
here now.
Copyright � 1998-2002 Tulips and Bears LLC.
All Rights Reserved. Republication of this material,
including posting to message boards or news groups,
without the prior written consent of Tulips and Bears LLC
is strictly prohibited. 'Tulips and Bears' is a registered trademark of
Tulips and Bears LLC
Last modified: April 02, 2001
Published By Tulips and Bears
LLC
